This article was published by The McAlvany Intelligence Advisor on Tuesday, December 22, 2015:
Every year about this time the Copenhagen-based Saxo Bank offers up its most outrageous predictions for the coming year. Some of them are doozies:
- Oil rebounds to $100 a barrel;
- The Russian ruble climbs 20 percent;
- The Euro jumps to $1.23 (it's currently at $1.08 and dropping);
- Democrats retake Congress in a landslide; and
- Silver soars by 33 percent.
By far the most outrageous, however, is this bit of Keynesian claptrap in Brazil:
We look for the host of the 2016 Olympics to lead [the emerging markets] out of their current malaise, with equities outperforming.
It's going to take a very thick prayer rug for anything like that to happen to Brazil. Thanks to decades of Marxist ideology and interventionism, the culture there has become so corrupted that it would take a massive moral reversal even to come close to fulfilling this prophetic outrage.
On Wednesday Fitch downgraded Brazilian debt to junk status, a move that caught almost no one by surprise. Standard and Poor's made that move in September, and Moody's is likely to follow shortly.
These downgrades reflect a long litany of difficulties Brazilians have faced for years, masked briefly by its inclusion as a BRIC (Brazil, Russia, India, china) country seven years ago, and the prediction by the International Monetary Fund (IMF) in 2013 that Brazil's economy would grow four percent annually for the foreseeable future.
The steady decline in the purchasing power of its currency (the real), the drop in the country's stock market (as measured by the Bovespa), the sharp decline in wages, the rise in unemployment, and the increasing cost of servicing its massive debt (that takes eight percent of the country's output just to service) have all contributed to the decline in confidence by Brazilians in their future. Add to this the huge decline in commodity prices, especially oil, and the impeachment proceedings (see protests above) just launched against their president for overseeing massive corruption by the country's oil company, and it's safe to say that the future for Brazilians looks bleak. Not helping any is the strong dollar and the decline of China's economy, which has cut exports of raw materials dramatically.
For a brief period there, about seven years ago, Brazil was one of the BRIC countries poised to overtake the developed nations of the world in economic growth. Commodity prices were soaring, including oil, which should have made Brazil rich as Croesus. But instead, Marxists ranging from Lula to Rouseff spent the money, and doubled down by borrowing more, all to feed a growing welfare state.
When oil prices began their descent and China's “miracle” began to fade, Brazil, an exporter of oil and agricultural products (including lots of coffee), found itself in deep kimchee. Taking its cue from John Maynard Keynes, president Dilma Rouseff decided to spend more, hastening the current implosion. Part of the new program was predicated on the failed concept that public works – like building out the facilities for next year's Olympic Games – would somehow jumpstart the private economy.
The results were predictable. The Brazilian currency, the real, has lost 40 percent of its value against the dollar the last year. The Bovespa is down more than 20 percent over the same period. Unemployment is in double digits, wages are declining, Brazilian government debt is being offloaded in vast quantiles by index funds (thanks to the downgrade to junk), deficits are skyrocketing, money printing is driving prices skyward causing wage and price controls to be imposed. Those controls are creating shortages of essentials, creating a thriving black market that is bankrupting citizens who still have a job.
Antony Mueller, who teaches Austrian economics (!) at Brazil's Federal University of Sergipe, has been watching Brazil's implosion with increasing dismay:
Bureaucracy is a nightmare without end. Taxation is high and brings little return. The public educational system is in shambles. The legal system is unable to cope with an enormous backlog of unresolved cases, while at the same time, judges and other legal authorities enjoy grandiose privileges. Salaries in the judiciary are astronomical compared to what the average person or the poorer parts of the Brazilian society earn….
The ideological dominance of statism, socialism, and interventionism is present in every layer of the Brazilian society – not only in politics or academia, but also in the business community itself….
Anybody with an alert mind must see that statism has failed; that the ideas of socialism and interventionism are sterile and that they produce mainly frustration, stagnation, and crises.
When asked how Brazilians could extricate themselves from such a system, Mueller replied:
Only based on a fundamental change of ideology in favor of markets and individual and entrepreneurial activity will countries like Brazil [re]gain long-term prosperity.
Absent providential intervention, to predict, however facetiously, that such a “fundamental change of ideology” might take place in Brazil by the soothsayers at Saxo really is outrageous. Decades of Marxist intervention have successfully erased morality there, with just a remnant able to articulate the causes of their malaise.
The Economist: Brazilian waxing and waning
Wall Street Journal: Gloom on Brazil Finances Deepens
the new american: Brazil's Petrobras Scandal Widens, Threatens President Rousseff
Saxo Bank's outrageous predictions
Reuters: Brazil stripped of investment grade rating as crisis deepens
Ryan McMaken: Brazil: Big Government, Small Wages
Antony Mueller: In Brazil, Free-Market Ideas Rise as the Economy Falls
London Telegraph: Brazil reduced to junk as BRICs facade crumbles
One year chart of Bovespa Index
DEMOGRAPHIC DYNAMICS IN BRAZIL
Brazilian Real vs. the US Dollar – one year chart